5Things to Know about New Zealand’s Budget

New Zealand’s government delivered an upbeat budget Thursday – in stark contrast to the one presented earlier this week in neighboring Australia. The centerpiece of the National Party’s budget is a projected surplus in 2014-‘15, which would be the first time in seven years New Zealand government accounts were in the black. Economic forecasts also remain positive, with New Zealand benefiting from growing demand for dairy products among Asia’s middle classes, and a construction boom as rebuilding intensifies from a 2011 earthquake.

1The forecasts

Finance Minister Bill English has promised a small surplus in the year through June 2015, followed by successively larger ones. This year’s budget forecasts a surplus of NZ$372 million (US$322 million) in the year to June 2015, higher than the NZ$86 million the government forecast last December. Economic growth is expected to average 2.8% over the next four years and peak at 4% in 2015. Key for ratings agencies is New Zealand’s net government debt, which the government said will peak at 26.4% in the year to June 2015 but then fall to 20% of GDP by June 2020. The government’s books “are the envy of most developed countries,” Mr. English said.

2The risks

New Zealand — which accounts for one-third of global dairy exports — has benefited from a surge in demand for dairy products from Asia’s growing middle classes, and a construction boom following earthquakes in the city of Christchurch. However, dairy prices have fallen by more than 20% since mid-February, and the Christchurch rebuild will eventually slow. The Treasury stressed Thursday that its forecasts are based on the terms of trade remaining strong, but notes that the balance of global risks remains skewed to the downside, potentially weighing on exports.

3The sweeteners

The budget appears to contain some sweeteners aimed at winning voters’ hearts ahead of national elections in September. The operating allowance for new spending stands at NZ$1 billion in 2014-‘15, but increases to NZ$1.5 billion the following year and by 2% a year after that. The budget includes a NZ$500 million “children and families package” and NZ$172 million to extend a parental-leave scheme. Spending on parental tax credits also would rise, and early-childhood centers are set to receive an additional NZ$156 million.

4The impact

On top of central bank rate increases in March and April, the fiscally responsible budget and upbeat forecasts are likely to make the New Zealand dollar even more attractive to investors – a headwind for the country’s exports. The budget “contains nothing but good news, with a fiscal position looking at its strongest in years,” TD Securities Head of Asia-Pacific Research Annette Beacher said.

5The reaction

Ratings agencies were upbeat about the presentation. Steven Hess, senior vice president at Moody’s Sovereign Risk Group, said the budget “looks reasonable” and the track to surplus “is a positive trend from a ratings perspective.” Standard & Poor’s Ratings Services said the forecasts are consistent with its current rating.